NOTE 1 – CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the
Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of
operations, and cash flows at September 30, 2017, and for all
periods presented herein, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have
been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's
June 30, 2017 audited financial statements. The results
of operations for the periods ended September 30, 2017 and 2016 are
not necessarily indicative of the operating results for the full
years.
NOTE 2 – GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles in the United States of America
applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of
business. The Company has an accumulated deficit of
$74,293,242, negative working capital of
($10,259,833) and currently
has revenues which are insufficient to cover its operating costs,
which raises substantial doubt about its ability to continue as a
going concern. The Company has not yet established an ongoing
source of revenues sufficient to cover its operating costs and
allow it to continue as a going concern.
The future of the Company as an operating business will depend on
its ability to (1) obtain sufficient capital contributions and/or
financing as may be required to sustain its operations and (2) to
achieve adequate revenues from its ProMaster and AfterMaster
businesses. Management's plan to address these issues includes, (a)
continued exercise of tight cost controls to conserve cash, (b)
obtaining additional financing, (c) more widely commercializing the
AfterMaster and ProMaster products, and (d) identifying and
executing on additional revenue generating
opportunities.
The ability of the Company to continue as a going concern is
dependent upon its ability to successfully accomplish the plans
described in the preceding paragraph and eventually secure other
sources of financing and attain profitable operations. The
accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern. If the Company is unable to obtain adequate capital,
it could be forced to cease operations.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenue and expenses during the reporting
periods. Significant estimates are made in relation to the
allowance for doubtful accounts and the fair value of certain
financial instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of
AfterMaster, Inc. and its subsidiaries. All significant
inter-Company accounts and transactions have been
eliminated.
Investments
Our available for securities are considered Level 1. Realized gains
and losses on these securities are included in “Other income
(expense) – net” in the consolidated statements of
operations using the specific identification method. Unrealized
gains and losses, on available-for-sale securities are recorded in
accumulated other comprehensive income (accumulated OCI).
Unrealized losses that are considered other than temporary are
recorded in other income (expense) – net, with the
corresponding reduction to the carrying basis of the
investment.
Our short-term investments are recorded at amortized cost, and the
respective carrying amounts approximate fair values. Our available
for securities maturing within one year are recorded in
“Other current assets,” on the balance
sheets.
Accounts Receivables
Accounts receivables are stated at amounts management expects to
collect. An allowance for doubtful accounts is provided for
uncollectible receivables based upon management's evaluation of
outstanding accounts receivable at each reporting period
considering historical experience and customer credit quality and
delinquency status. Delinquency status is determined by contractual
terms. Bad debts are written off against the allowance when
identified.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
-
continued
Fair Value Instruments
Cash is the Company’s only financial asset or liability
required to be recognized at fair value and is measured using
quoted prices for active markets for identical assets (Level 1 fair
value hierarchy). The carrying amounts reported in the
balance sheets for notes receivable and accounts payable and
accrued expenses approximate their fair market value based on the
short-term maturity of these instruments.
Market prices are not available for the Company’s loans due
to related parties or its other notes payable, nor are market
prices of similar loans available. The Company
determined that the fair value of the notes payable based on its
amortized cost basis due to the short-term nature and current
borrowing terms available to the Company for these
instruments.
Derivative Liabilities
The Company has financial instruments that are considered
derivatives or contain embedded features subject to derivative
accounting. Embedded derivatives are valued separately from the
host instrument and are recognized as derivative liabilities in the
Company’s balance sheet. The Company measures these
instruments at their estimated fair value and recognizes changes in
their estimated fair value in results of operations during the
period of change. The Company has a sequencing policy
regarding share settlement wherein instruments with the earliest
issuance date would be settled first. The sequencing policy also
considers contingently issuable additional shares, such as those
issuable upon a stock split, to have an issuance date to coincide
with the event giving rise to the additional shares.
Using this sequencing policy, the Company used this sequencing
policy, all instruments convertible into common stock, including
warrants and the conversion feature of notes payable, issued
subsequent to July 5, 2016 until the note was converted on the same
day were derivative liabilities. The Company again used this
sequencing policy, all instruments convertible into common stock,
including warrants and the conversion feature of notes payable,
issued subsequent to August 19, 2016 until the note was converted
on August 22, 2016 were derivative liabilities.
The Company entered into multiple amendments to a note payable to
extend the maturity date (the Amendments). The Company agreed to
additional $30,000 extension fees which were converted at a
percentage discount (variable) exercise price which causes the
number to be converted into a number of common shares that
“approach infinity”, as the underlying stock price
could approach zero. This creates a situation where the Company no
longer has shares enough available to “cover” all
potential equity issuance obligations during the period of issuance
until conversion.
On February 3, 2017, the company entered into a note payable with
an unrelated party at a percentage discount (variable) exercise
price which causes the number to be converted into a number of
common shares that “approach infinity”, as the
underlying stock price could approach zero. Accordingly, all
convertible instruments issued after February 3, 2017 are
considered derivatives according to the Company’s sequencing
policy.
The Company values these convertible notes payable using the
multinomial lattice method that values the derivative liability
within the notes based on a probability weighted discounted cash
flow model. The resulting liability is valued at each reporting
date and the change in the liability is reflected as change in
derivative liability in the statement of operations.
Income Taxes
There is no income tax provision for the three months ended
September 30, 2017 and 2016 due to net operating losses for which
there is no benefit currently available.
At September 30, 2017, the Company had deferred tax assets
associated with state and federal net operating losses. The Company
has recorded a corresponding full valuation allowance as it is more
likely than not that some portion of all of the deferred tax assets
will not be realized.
Revenue Recognition
The Company applies the provisions of FASB ASC
605,
Revenue Recognition in
Financial Statements
, which
provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. ASC 605 outlines the basic
criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In
general, the Company recognizes revenue related to goods and
services provided when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered,
(iii) the fee is fixed or determinable, and (iv) collectability is
reasonably assured.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
-
continued
The Company's revenues are generated from AfterMaster products and
services, AfterMaster Pro, sessions revenue, and
remastering.
Revenues related to
AfterMaster Pro sells through consumer retail distribution channels
and through our website. For sales through consumer retail
distribution channels, revenue recognition occurs when title and
risk of loss have transferred to the customer which usually occurs
upon shipment to the customers. We established allowances for
expected product returns and these allowances are recorded as a
direct reduction to revenue. Return allowances are based on our
historical experience. Revenues related to sessions and remastering
are recognized when the event occured.
Cost of Revenues
The Company’s cost of revenues includes employee costs, and
other nominal amounts. Costs associated with products
are recognized at the time of the sale and when the inventory is
shipped. Costs incurred to provide services are recognized as cost
of sales as incurred. Depreciation is not included within cost of
revenues.
Loss Per Share
Basic loss per Common Share is computed by dividing losses
attributable to Common shareholders by the weighted-average number
of shares of Common Stock outstanding during the period. The losses
attributable to Common shareholders was increased for accrued and
deemed dividends on Preferred Stock during the three months ended
September 30, 2017 and 2016 of $56,367 and $42,238,
respectively.
Diluted earnings per Common Share is computed by dividing net loss
attributable to Common shareholders by the weighted-average number
of Shares of Common Stock outstanding during the period increased
to include the number of additional Shares of Common Stock that
would have been outstanding if the potentially dilutive securities
had been issued. Potentially dilutive securities include
outstanding convertible Preferred Stock, stock options, warrants,
and convertible debt. The dilutive effect of potentially dilutive
securities is reflected in diluted earnings per share by
application of the treasury stock method. Under the treasury stock
method, an increase in the fair market value of the Company’s
Common Stock can result in a greater dilutive effect from
potentially dilutive securities.
For the three months ended September 30, 2017 and 2016, all of the
Company’s potentially dilutive securities (warrants, options,
convertible preferred stock, and convertible debt) were excluded
from the computation of diluted earnings per share as they were
anti-dilutive. The total number of potentially dilutive
Common Shares that were excluded were 37,364,624 and 27,689,839 at
September 30, 2017 and 2016, respectively.
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements
issued since the last audit of our consolidated financial
statements. The Company’s management believes that these
recent pronouncements will not have a material effect on the
Company’s consolidated financial statements.
NOTE 4 – SECURITIES AVAILABLE-FOR-SALE
On November 10, 2014, the Company received 600,000 shares of b
Booth stock as part of an Asset License agreement with b Booth. The
following table presents the amortized cost, gross unrealized
gains, gross unrealized losses, and fair market value of
available-for-sale equity securities, nearly all of which are
attributable to the Company's investment in b Booth stock, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
$
123,600
|
$
(75,660
)
|
$
-
|
$
-
|
$
-
|
$
47,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
$
63,600
|
$
60,000
|
$
-
|
$
-
|
$
-
|
$
123,600
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
Convertible Notes Payable
In accounting for its convertible notes payable, proceeds from the
sale of a convertible debt instrument with Common Stock purchase
warrants are allocated to the two elements based on the relative
fair values of the debt instrument without the warrants and of the
warrants themselves at time of issuance. The portions of the
proceeds allocated to the warrants are accounted for as paid-in
capital with an offset to debt discount. The remainder of
the proceeds are allocated to the debt instrument portion of the
transaction as prescribed by ASC 470-25-20. The
Company then calculates the effective conversion price of the note
based on the relative fair value allocated to the debt instrument
to determine the fair value of any beneficial conversion feature
(“BCF”) associated with the convertible note in
accordance with ASC 470-20-30. The BCF is recorded to
additional paid-in capital with an offset to debt
discount. Both the debt discount related to the issuance
of warrants and related to a BCF is amortized over the life of the
note.
Convertible Notes Payable – Related Parties
Convertible notes payable due to related parties consisted of the
following as of September 30, 2017 and June 30, 2017,
respectively:
|
Convertible
Notes Payable – Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes
with total face value of $3,925,000 issued from February 2010 to
April 2013, interest rates range from 10% to 15%, net of
unamortized discount of $0 as of September 30, 2017 and June 30,
2017.
|
$
3,925,000
|
$
3,925,000
|
|
$30,000
face value, issued in August 2016, interest rate of 0%, matures
January 2017, a gain on extinguishment of debt was recorded
totaling $3,818 net unamortized discount of $0 as of September 30,
2017 and June 30, 2017.
|
30,000
|
26,182
|
|
Total convertible
notes payable – related parties
|
3,955,000
|
3,951,182
|
|
Less current
portion
|
3,955,000
|
3,951,182
|
|
Convertible notes
payable – related parties, long-term
|
$
-
|
$
-
|
Convertible Notes Payable - Non-Related Parties
Convertible notes payable due to non-related parties consisted of
the following as of September 30, 2017 and June 30, 2017,
respectively:
|
Convertible Notes Payable - Non-Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
$7,000
face value, issued in July 2014, interest rate of 6%, matures
October 2017, net unamortized discount of $0 as of September 30,
2017 and June 30, 2017, respectively.
|
$
7,000
|
$
7,000
|
|
$600,000
face value, issued in November 2015, interest rate of 0%, an OID of
$190,000, matures November 2017, net unamortized discount of $0 of
J September 30, 2017 and June 30, 2017, respectively, of which
$260,000 has been paid.
|
430,000
|
430,000
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
|
$100,000
face value, issued in February 2016, interest rate of 10%, matures
March 2018, net unamortized discount of $0 as of September 30, 2017
and June 30, 2017, respectively.
|
100,000
|
100,000
|
|
$25,000
face value, issued in February 2016, interest rate of 10%, matures
February 2017, net unamortized discount of $0 as of September 30,
2017 and June 30, 2017, respectively.
|
25,000
|
25,000
|
|
$100,000
face value, issued in March 2016, interest rate of 10%, matures
June2017, net unamortized discount of $0 as of September 30, 2017
and June 30, 2017, respectively.
|
100,000
|
100,000
|
|
$10,000
face value, issued in March 2016, interest rate of 10%, matures
March 2018, net unamortized discount $0 of September 30, 2017 and
June 30, 2017, respectively.
|
10,000
|
10,000
|
|
$50,000
face value, issued in July 2016, interest rate of 0%, matures
October 2017, net unamortized discount of $0 of September 30, 2017
and June 30, 2017, respectively.
|
50,000
|
50,000
|
|
$50,000
face value, issued in August 2016, interest rate of 0%, matures
September which was amended to January 2018, net unamortized
discount of $44,308 and $5,418 of September 30, 2017 and June 30,
2017, respectively.
|
5,692
|
44,582
|
|
$1,000,000
face value, issued in September 2016, interest rate of 10%, matures
June 2017, net unamortized discount of $0 as of September 30, 2017
and June 30, 2017, respectively.
|
1,000,000
|
1,000,000
|
|
$149,000
face value, issued in February 2017, interest rate of 10%, matures
November 2017, net amortized discount of $0 and $59,740 as of
September 30, 2017 and June 30, 2017, respectively, of which
$20,000 has been paid.
|
129,000
|
89,260
|
|
$224,000
face value, issued in February 2017, interest rate of 10%, matures
November 2017, net amortized discount of $32,452 and $119,795 as of
September 30, 2017 and June 30, 2017, respectively, of which
$15,000 has been paid.
|
176,548
|
104,205
|
|
$258,000
face value, issued in February 2017, interest rate of 12%, matures
August 2017, net amortized discount of $0 and $48,464 as of
September 30, 2017 and June 30, 2017, respectively, of which
$185,000 has been paid.
|
133,000
|
209,536
|
|
$55,000
face value, issued in June 2017, interest rate of 10%, matures
January 2018, net amortized discount of $26,986 and $50,631 as of
September 30, 2017 and June 30, 2017, respectively.
|
28,014
|
4,369
|
|
$100,000
face value, issued in June 2017, interest rate of 7%, matures June
2018, net amortized discount of $39,130 and $52,317 as of September
30, 2017 and June 30, 2017, respectively.
|
60,870
|
47,683
|
|
$265,000
face value, issued in May 2017, interest rate of 10%, matures
February 2018, net amortized discount of $132,028 and $218,790 as
of September 30, 2017 and June 30, 2017, respectively.
|
132,972
|
46,210
|
|
$78,000
face value, issued in July 2017, interest rate of 12%, matures May
2018, net amortized discount of $61,187 as of September 30,
2017.
|
16,813
|
-
|
|
$50,000
face value, issued in August 2017, interest rate of 0%, matures
October 2017, net amortized discount of $0 as of September 30,
2017, of which $34,000 has been converted.
|
16,000
|
-
|
|
$60,500
face value, issued in August 2017, interest rate of 12%, matures
August 2018, net amortized discount of $50,721 as of September 30,
2017.
|
9,779
|
-
|
|
$10,000
face value, issued in August 2017, interest rate of 0%, matures
August 2018, net amortized discount of $8,204 as of September 30,
2017.
|
1,796
|
-
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
|
$82,250
face value, issued in August 2017, interest rate of 12%, matures
May 2018, net amortized discount of $68,542 as of September 30,
2017.
|
13,708
|
-
|
|
$53,000
face value, issued in August 2017, interest rate of 12%, matures
June 2018, net amortized discount of $45,155 as of September 30,
2017.
|
7,845
|
-
|
|
$65,000
face value, issued in September 2017, interest rate of 12%, matures
March 2018, net amortized discount of $57,099as of September 30,
2017.
|
7,901
|
-
|
|
$10,000
face value, issued in September 2017, interest rate of 10%, matures
September 2018, net amortized discount of $9,479 as of September
30, 2017.
|
521
|
-
|
|
$5,000
face value, issued in September 2017, interest rate of 0%, matures
March 2018, net amortized discount of $4,752 as of September 30,
2017.
|
247
|
-
|
|
$50,000
face value, issued in September 2017, interest rate of 0%, matures
November 2017, net amortized discount of $42,633 as of September
30, 2017.
|
7,367
|
-
|
|
Total
convertible notes payable – non-related parties
|
2,470,073
|
2,267,845
|
|
Less
current portion
|
2,470,073
|
2,267,845
|
|
Convertible
notes payable – non-related parties, long-term
|
$
-
|
$
-
|
On November 20, 2015, the Company issued a convertible note to an
unrelated company for $600,000 that matures on May 20,
2016. The company paid $200,000 in principle balance leaving a
remain balance of $430,000 including the extension fees and is
not convertible unless the borrower defaults under the amendment
agreement dated January 1, 2017. The note bears 0% interest
and had an original issue discount (OID) of $100,000. This note is
not convertible unless there is a default event, so no BCF was
valued. The Company extended the maturity date for the sixth time
by issuing additional $30,000 convertible notes on January 1, 2017
to February 15, 2017 and per the terms of the note there are no
derivatives until it becomes convertible on the original note,
however the $30,000 addition for the extension is to be considered
derivatives. The Lender released a clarification of amendments to
convertible promissory notes that explained the $30,000 extension
fees are the only portion that is to be considered as convertible
and converts within 2 days of issuance. The intent of the amendment
agreements were to insure the original note dated November 20, 2015
in the amount of $600,000. Due to the conversion into 145,929
shares of common stock on January 1, 2017 (extension date) and
January 3, 2017 (conversion date) sequencing is required on other
instruments. Because the terms do not dictate a maximum numbers of
convertible shares, the ability to settle these obligations with
shares would be unavailable causing these obligations to
potentially be settled in cash. This condition creates a derivative
liability Under ASC 815-40. The Company has a sequencing policy
regarding share settlement wherein instruments with the earliest
issuance date would be settled first. The sequencing policy also
considers contingently issuable additional shares, such as those
issuable upon a stock split, to have an issuance date to coincide
with the event giving rise to the additional shares. During the
extension and conversion day period no additional convertible
instruments were issued, therefore on the extension was considered
in the derivative calculation. The Company extended the maturity
date for the seventh time by increasing the principal balance by
$30,000 on February 27, 2017 to May 6, 2017. The Company
evaluated amendment under ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt. The Company extended the maturity date for the eighth
time by increasing the principal balance by $30,000 on May 9, 2017
to June 20, 2017. The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt. The Company extended the maturity date for the ninth
time by increasing the principal balance by $30,000 on June 20,
2017 to August 4, 2017. The Company evaluated amendment under
ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt. The Company extended the maturity date for the tenth
time by paying additional consideration of $30,000 on August 3,
2017 to September 18, 2017. The Company evaluated amendment
under ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt. The Company extended the maturity date for the tenth
time by paying additional consideration of $30,000 on September 18,
2017 to November 2, 2017. The Company evaluated amendment
under ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
On February 15, 2016, the Company issued a convertible note to an
unrelated individual for $25,000 that matures on February 15, 2017.
The note was amended subsequently in September 28, 2017 to extend
the maturity date to October 15, 2017. The Company evaluated
amendment under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On February 23, 2017, the Company issued a convertible note to an
unrelated company for $149,000 that matures on November 23, 2017.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at lesser of 40% of the
average three lowest closing bids 20 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, that
this percentage discount (variable) exercise
price indicates is an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value. The Company
extended the possibility to convert date by issuing 60,000 warrants
valued at $7,813 on September 8, 2017 to November 2,
2017.
The warrants are
considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On February 23, 2017, the Company issued a convertible note to an
unrelated company for $224,000 that matures on November 23, 2017.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at lesser of 40% of the
average three lowest closing bids 20 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value. The Company
extended the possibility to convert date by issuing 90,000 warrants
valued at $11,720 on September 8, 2017 to November 2,
2017.
The warrants are
considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On August 26, 2016, the Company issued a convertible note to an
unrelated individual for $50,000 that matures on August 26,
2017. The note bears interest rate of 10% per annum and
is convertible into shares of the Company’s Common stock at
$0.40 per share. The note was amended on June 30, 2017 to extend
the maturity date to October 1, 2017. The Company evaluated
amendment under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the debt.
The note was amended again on September 28, 2017 to extend the
maturity date to January 1, 2018. The Company evaluated amendment
under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension resulted in significant and consequential changes to
the economic substance of the debt and thus resulted in a
extinguishment of the debt. The Company recorded a debt discount of
$30,000 as a result of the extinguishment.
On March 7, 2016, the Company issued a convertible note to an
unrelated individual for $100,000 that matures on March 7, 2017.
The note bears interest rate of 10% per annum and is convertible
into shares of the Company’s Common stock at $0.40 per
share. The Company valued a BCF related to the note
valued at $24,269 and debt discount related to the 10,000 shares of
common stock issued with the note at a relative fair value of
$4,569.
The note was amended
again on September 28, 2017 to extend the maturity date to January
15, 2018, as additional consideration the Company issued 25,000
shares of common stock valued at $3,998. The Company evaluated
amendment under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
On July 26, 2016, the Company issued a convertible note to an
unrelated individual for $50,000 that matures on September 26,
2016. The note bears interest rate of 0% per annum and
is convertible into shares of the Company’s Common stock at
$0.40 per share, as part of the note the company issued warrants to
purchase 35,000 shares of 144 restricted common stock at an
exercise price $0.30 for a two-year period. The note was amended on
September 28, 2017 to extend the maturity date to January 15, 2018,
as additional consideration the Company issued 15,000 shares of
common stock valued at $2,399. The Company evaluated amendment
under ASC 470-50, “
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On July 31, 2017, the Company issued a convertible note to an
unrelated company for $78,000, which included $75,000 in proceeds
and $3,000 in legal fees, that matures on April 10, 2018. The note
bears 12% interest per annum and is convertible into shares of
the Company’s common stock at 61% of the lowest two trading
prices during the fifteen (15) trading day period ending to the
date of conversion. The note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value.
On August 2, 2017, the Company issued a convertible note to an
unrelated party for $50,000 that matures on August 24, 2017. The
note bears 0% interest per annum, in lieu of interest the Company
issued 12,000 shares of common stock on August 4, 2017. The note is
convertible into shares of the Company’s common stock at
$0.10 per share. Due to sequencing on February 2, 2017, the
Company determined under ASC 815, the Company has determined that
the note is to be treated as an embedded derivative financial
liability, which requires bifurcation and to be separately
accounted for. At each reporting period, the Company will mark this
derivative financial instrument to its estimated fair
value
. The note was amended
on September 15, 2017, to extend the maturity date to October 15,
2017. The Company evaluated amendment under ASC 470-50,
“
Debt
- Modification and Extinguishment”
, and concluded that
the extension did not result in significant and consequential
changes to the economic substance of the debt and thus resulted in
a modification of the debt and not extinguishment of the
debt.
On September 15,
2017, the note converted the principal of $34,000 for $340,000
shares of common stock.
On August 2, 2017, the Company issued a convertible note to an
unrelated company for $60,500, which includes proceeds of $55,000,
and $5,500 in OID, that matures on August 2, 2018. The note bears
12% interest per annum and is convertible into shares of the
Company’s common stock at 61% of the lowest two trading
prices during the fifteen (15) trading day period ending to the
date of conversion. The note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value.
On August 4, 2017, the Company issued a convertible note to
an unrelated party for $10,000 that matures on August 4, 2018. The
note bears 0% interest per annum, in lieu of interest the Company
issued 3,500 shares of common stock on August 7, 2017. The note is
convertible into shares of the Company’s common stock at
$0.10 per share. Due to sequencing on February 2, 2017, the
Company determined under ASC 815, the Company has determined that
the note is to be treated as an embedded derivative financial
liability, which requires bifurcation and to be separately
accounted for. At each reporting period, the Company will mark this
derivative financial instrument to its estimated fair
value
.
On August 15, 2017, the Company issued a convertible note to an
unrelated company for $82,250, which included $75,000 in proceeds
and $7,250 in legal and other fees, that matures on April 18, 2018.
The note bears 12% interest
per annum and is convertible into shares of the
Company’s common stock at 60% the lowest trading price during
the previous twenty (2) days to the date of conversion. The
note contains a percentage discount (variable) exercise price
which causes the number to be converted into a number of common
shares that “approach infinity”, as the underlying
stock price could approach zero. The Company determined under
ASC 815, the Company has determined that this percentage
discount (variable) exercise price indicates an embedded
derivative financial liability, which requires bifurcation and to
be separately accounted for. At each reporting period, the Company
will mark this derivative financial instrument to its estimated
fair value.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
On August 16, 2017, the Company issued a convertible note to an
unrelated company for $53,000, which included $50,000 in proceeds
and $3,000 in legal fees, that matures on June 16, 2018. The note
bears 12% interest per annum and is convertible into shares of
the Company’s common stock at 61% of the lowest two trading
prices during the fifteen (15) trading day period ending to the
date of conversion. The note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value.
On September 8, 2017, the Company issued a convertible note to an
unrelated company for $65,000, which included $58,500 in proceeds
and $6,500 in OID, that matures on March 8, 2018. The note bears
12% interest per annum and is convertible into shares of the
Company’s common stock at 55% of either the lowest sales
price for common stock on principal market during the twenty-five
consecutive trading days including the immediately preceding the
conversion date. The note contains a percentage discount
(variable) exercise price which causes the number to be converted
into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value.
On September 11, 2017, the Company issued a convertible note to an
unrelated party for $10,000 that matures on September 11, 2018. The
note bears 10% interest per annum. The note is convertible into
shares of the Company’s common stock at $0.10 per
share. Due to sequencing on February 2, 2017, the Company
determined under ASC 815, the Company has determined that the note
is to be treated as an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value
.
On September 27, 2017, the Company issued a convertible note to an
unrelated party for $5,000 that matures on March 31, 2018. The note
bears 0% interest per annum. The note is convertible into shares of
the Company’s common stock at $0.10 per share. Due to
sequencing on February 2, 2017, the Company determined under ASC
815, the Company has determined that the note is to be treated as
an embedded derivative financial liability, which requires
bifurcation and to be separately accounted for. At each reporting
period, the Company will mark this derivative financial instrument
to its estimated fair value
.
On September 28, 2017, the Company issued a convertible note to an
unrelated party for $50,000 that matures on November 28, 2017. The
note bears 0% interest per annum. The note is convertible into
shares of the Company’s common stock at $0.10 per
share. Due to sequencing on February 2, 2017, the Company
determined under ASC 815, the Company has determined that the note
is to be treated as an embedded derivative financial liability,
which requires bifurcation and to be separately accounted for. At
each reporting period, the Company will mark this derivative
financial instrument to its estimated fair value
.
Notes Payable – Related Parties
Notes payable due to related parties consisted of the following as
of September 30, 2017 and June 30, 2017, respectively:
|
Notes Payable –
Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes
with total face value of $627,500 issued from April 11 to June 17,
interest rates range from 0% to 15%, net of unamortized discount of
$0 as of September 30, 2017 and June 30, 2017, respectively, of
which $45,000 has been paid.
|
$
600,000
|
$
610,000
|
|
$18,000
face value, issued in September 2017, interest rate of 0%, matures
November 2017.
|
18,000
|
-
|
|
Total notes payable
– related parties
|
618,000
|
610,000
|
|
Less current
portion
|
618,000
|
610,000
|
|
Notes payable -
related parties, long term
|
$
-
|
$
-
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 5 – NOTES PAYABLE
-
continued
On September 28, 2017, the Company issued a note to an unrelated
party for $18,000 that matures on November 28, 2017. The note bears
0% interest per annum.
Notes Payable
–
Non-Related
Parties
Notes payable due to non-related parties consisted of the following
as of September 30, 2017 and June 30, 2017,
respectively:
|
Notes
Payable
–
Non-Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
Various term notes
with total face value of $40,488 due upon demand, interest rates
range from 0% to 14%.
|
$
40,488
|
$
40,488
|
|
$52,000
face value, issued in August 2017, interest rate of 0%, matures
October 2017 net of unamortized discount of $7,227 as of September
30, 2017.
|
44,773
|
-
|
|
$52,000
face value, issued in August 2017, interest rate of 0%, matures
October 2017 net of unamortized discount of $7,604 as of September
30, 2017.
|
44,396
|
-
|
|
$81,000
face value, issued in September 2017, interest rate of 8% per
month, matures March 2018 net of unamortized discount of $14,913 as
of September 30, 2017.
|
66,087
|
-
|
|
Total note payable
– non-related parties
|
195,744
|
40,488
|
|
Less current
portion
|
195,744
|
40,488
|
|
Notes payable
– non-related parties, long-term
|
$
-
|
$
-
|
On August 25, 2017, the Company issued a note to an unrelated party
for $52,000 as part of an Accounts Receivable Financing Agreement,
which included $50,000 in proceeds and an OID of $2,000, that
matures on October 25, 2017. The note bears 0% interest per annum.
As additional consideration
the Company also issued
50,000 warrants valued at $6,625. The warrants are considered
derivative liabilities under ASC 815-40 under the Company’s
sequencing policy and were valued using the
multinomial lattice model
.
On August 31, 2017, the Company issued a note to an unrelated party
for $52,000 as part of an Accounts Receivable Financing Agreement,
which included $50,000 in proceeds and an OID of $2,000, that
matures on October 31, 2017. The note bears 0% interest per annum.
As additional consideration
the Company also issued
50,000 warrants valued at $6,773. The warrants are considered
derivative liabilities under ASC 815-40 under the Company’s
sequencing policy and were valued using the
multinomial lattice model
.
On September 19, 2017, the Company issued a note to an unrelated
party for $81,000 which included $74,504 in proceeds, $6,000 in
OID, and $496 in other fees, that matures on March 19, 2018. The
note bears 8% interest per month. As additional
consideration
the Company is to issue
75,000 shares of common stock within 10 days.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 6 – CONVERTIBLE PREFERRED STOCK
The Company has authorized 10,000,000 shares of $0.001 par value
per share Preferred Stock, of which the following were issued
outstanding:
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred
|
100,000
|
15,500
|
-
|
|
Series
A-1 Convertible Preferred
|
3,000,000
|
2,585,000
|
3,581,964
|
|
Series
B Convertible Preferred
|
200,000
|
3,500
|
35,000
|
|
Series
C Convertible Preferred
|
1,000,000
|
13,404
|
-
|
|
Series
D Convertible Preferred
|
375,000
|
130,000
|
-
|
|
Series
E Convertible Preferred
|
1,000,000
|
275,000
|
-
|
|
Series
P Convertible Preferred
|
600,000
|
86,640
|
-
|
|
Series
S Convertible Preferred
|
50,000
|
-
|
-
|
|
Total
Preferred Stock
|
6,325,000
|
3,109,044
|
3,616,964
|
The Company's Series A Convertible Preferred Stock ("Series A
Preferred") is convertible into Common Stock at the rate of 0.025
share of Common stock for each share of the Series A Preferred.
Dividends of $0.50 per share annually from date of issue, are
payable from retained earnings, but have not been declared or
paid.
The Company’s Series A-1 Senior Convertible Redeemable
Preferred Stock (“Series A-1 Preferred”) is convertible
at the rate of 2 shares of Common Stock per share of Series A-1
Preferred. The dividend rate of the Series A-1 Senior Convertible
Redeemable Preferred Stock is 6% per share per annum in cash, or
commencing on June 30, 2009 in shares of the Company’s Common
Stock (at the option of the Company).
Due to the fact that the Series A-1 Preferred has certain features
of debt and is redeemable, the Company analyzed the Series A-1
Preferred in accordance with ASC 480 and ASC 815 to determine if
classification within permanent equity was
appropriate. Based on the fact that the redeemable
nature of the stock and all cash payments are at the option of the
Company, it is assumed that payments will be made in shares of the
Company’s Common Stock and therefore, the instruments are
afforded permanent equity treatment.
The Company's Series B Convertible 8% Preferred Stock ("Series B
Preferred") is convertible at the rate of 0.067 share of Common
Stock for each share of Series B Preferred. Dividends from date of
issue are payable on June 30 from retained earnings at the rate of
8% per annum but have not been declared or paid.
The Company's Series C Convertible Preferred Stock ("Series C
Preferred") is convertible at a rate of 0.007 share of Common Stock
per share of Series C Preferred. Holders are entitled to
dividends only to the extent of the holders of the Company’s
Common Stock receive dividends.
The Company's Series D Convertible Preferred Stock ("Series D
Preferred") is convertible at a rate of 0.034 share of Common Stock
per share of Series D Preferred. Holders are entitled to
a proportionate share of any dividends paid as though they were
holders of the number of shares of Common Stock of the Company into
which their shares of are convertible as of the record date fixed
for the determination of the holders of Common Stock of the Company
entitled to receive such distribution.
The Company's Series E Convertible Preferred Stock ("Series E
Preferred") is convertible at a rate of 0.034 share of Common Stock
per share of Series E Preferred. Holders are entitled to a
proportionate share of any dividends paid as though they were
holders of the number of shares of Common Stock of the Company into
which their shares of are convertible as of the record date fixed
for the determination of the holders of Common Stock of the Company
entitled to receive such distribution.
The Company's Series P Convertible Preferred Stock ("Series P
Preferred") is convertible at a rate of 0.007 share of Common Stock
for each share of Series P Preferred. Holders are entitled to
dividends only to the extent of the holders of the Company’s
Common Stock receive dividends.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 6 – CONVERTIBLE PREFERRED STOCK
-
continued
In the event of a liquidation, dissolution or winding up of the
affairs of the Company, holders of Series A Preferred Stock, Series
P Convertible Preferred Stock, Series C Convertible Preferred Stock
have no liquidation preference over holders of the Company’s
Common Stock. Holders of Second Series B Preferred Stock
have a liquidation preference over holders of the Company’s
Common Stock and the Company’s Series A Preferred
Stock. Holders of Series D Preferred Stock are entitled
to receive, before any distribution is made with respect to the
Company’s Common Stock, a preferential payment at a rate per
each whole share of Series D Preferred Stock equal to
$1.00. Holders of Series E Preferred Stock are entitled
to receive, after the preferential payment in full to holders of
outstanding shares of Series D Preferred Stock but before any
distribution is made with respect to the Company’s Common
Stock, a preferential payment at a rate per each whole share of
Series E Preferred Stock equal to $1.00. Holders of
Series A-1 Preferred Stock
are superior in rank to the
Company’s Common Stock and to all other series of Preferred
Stock heretofore designated with respect to dividends and
liquidation.
The activity surrounding the issuances of the Preferred Stock is as
follows:
During the three months ended September 30, 2017 the Company did
not issue shares of Series A-1 Preferred.
During the fiscal year ended June 30, 2017 the Company issued
550,000 shares of Series A-1 Preferred Stock for $550,000 in
cash
and paid $196,853 in
cash offering costs
.
The Company had one
conversion of 150,000 shares of Series A-1 Preferred Stock for
300,000 shares of Common Stock, and issued 15,682 shares of Common
Stock of payment of $7,481 in accrued
dividends.
During the three months ended September 30, 2017 and 2016, the
outstanding Preferred Stock accumulated $56,367 and $42,238 in
dividends on outstanding Preferred Stock. The cumulative dividends
in arrears as of September 30, 2017 were approximately
$908,938.
NOTE 7 – COMMON STOCK
The Company has authorized 250,000,000 shares of $0.001 par value
per share Common Stock, of which 122,674,082 and 118,486,728 were
issued outstanding as of September 30, 2017 and June 30, 2017,
respectively. The activity surrounding the issuances of the Common
Stock is as follows:
For the Three Months Ended September 30, 2017
The Company issued
1,625,000
shares of Common Stock for $168,500 in cash as part of a private
placement, net of $1,500 of issuance costs,
respectively.
The Company issued 340,000 shares of Common Stock for the
conversion of notes and accrued interest valued at
$34,000.
The Company issued 120,000 shares of Common Stock as payment for
services and rent valued at $22,800.
The Company issued 115,500 shares of Common Stock for the incentive
with convertible notes valued at $15,963.
The Company issued 115,000 shares of Common Stock for the extension
of two convertible notes valued at $16,897.
As share-based compensation to employees and non-employees, the
Company issued 591,692 shares of common stock valued at $100,589,
based on the market price of the stock on the date of
issuance.
As interest expense on outstanding notes payable, the Company
issued 1,280,162 shares of common stock valued at $217,628 based on
the market price on the date of issuance.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 7 – COMMON STOCK
-
continued
For the Three Months Ended September 30, 2016
The Company issued 552,733 shares of Common Stock for the
conversion of notes and accrued interest valued at
$130,022.
The Company also issued 100,000 shares of Common Stock as incentive
to notes valued at $33,349 and recorded $30,519 in beneficial
conversion features related to new issuances of debt.
The Company issued 309,965 shares of Common Stock as payment for
services and rent valued at $122,136.
As share-based compensation to employees and non-employees, the
Company issued 271,831 shares of common stock valued at $106,014,
based on the market price of the stock on the date of issuance. As
interest expense on outstanding notes payable, the Company issued
524,715 shares of common stock valued at $204,639 based on the
market price on the date of issuance.
NOTE 8 – STOCK PURCHASE OPTIONS AND WARRANTS
The Board of Directors on June 10, 2009 approved the 2009 Long-Term
Stock Incentive Plan. The purpose of the 2009 Long-term
Stock Incentive Plan is to advance the interests of the Company by
encouraging and enabling acquisition of a financial interest in the
Company by employees and other key individuals. The 2009
Long-Term Stock Incentive Plan is intended to aid the Company in
attracting and retaining key employees, to stimulate the efforts of
such individuals and to strengthen their desire to remain with the
Company. A maximum of 1,500,000 shares of the Company's
Common Stock is reserved for issuance under stock options to be
issued
under the 2009 Long-Term Stock
Incentive Plan. The Plan permits the grant of incentive
stock options, nonstatutory stock options and restricted stock
awards. The 2009 Long-Term Stock Incentive Plan is
administered by the Board of Directors or, at its direction, a
Compensation Committee comprised of officers of the
Company.
Stock Purchase Options
During the three months ended September 30, 2017, the Company did
not issue any stock purchase options.
During the fiscal year ended June 30, 2017, the Company issued
500,000 stock purchase options.
The following table summarizes the changes in options outstanding
of the Company during the three months ended September 30,
2017.
|
Date Issued
|
|
Weighted
Average Exercise Price
|
Weighted
Average Grant Date Fair Value
|
|
|
|
Balance
June 30, 2017
|
525,000
|
$
0.18
|
$
0.16
|
4.81
|
$
93,750
|
|
Granted
|
-
|
-
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
|
Cancelled/Expired
|
-
|
-
|
-
|
-
|
-
|
|
Outstanding
as of September 30, 2017
|
525,000
|
$
0.18
|
$
0.20
|
4.56
|
$
93,750
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 8 – STOCK PURCHASE OPTIONS AND
WARRANTS
-
continued
Stock Purchase Warrants
During the three months ended September 30, 2017,
the Company issued warrants to purchase a
total
of
725,000
, consisting of 75,000
warrants as part of a private placement valued at $6,019, 100,000
warrants as part of two
AR
financing agreements executed on August 2017
valued at $13,398and
550,000 warrants in conjunction with extension of three promissory
notes valued at $54,491. The warrants are considered derivative
liabilities under ASC 815-40 under the Company’s sequencing
policy and were valued using the
multinomial lattice
model.
The following table presents the assumptions used to estimate the
fair values of the stock warrants and options granted:
|
|
|
September 30, 2017
|
|
June 30, 2017
|
|
Expected volatility
|
|
105-174%
|
|
92-126%
|
|
Expected dividends
|
|
0%
|
|
0%
|
|
Expected term
|
|
0-5 Years
|
|
0-5 Years
|
|
Risk-free interest rate
|
|
0.96-1.77%
|
|
0.74-1.89%
|
The following table summarizes the changes in warrants outstanding
issued to employees and non-employees of the Company during the
three months ended September 30, 2017.
|
|
|
Weighted
Average Exercise Price
|
Weighted
Average Grant Date Fair Value
|
|
|
|
Outstanding
as of June 30, 2017
|
39,927,097
|
$
0.38
|
$
0.45
|
3.38
|
$
15,144,835
|
|
Granted
|
725,000
|
0.20
|
0.10
|
3.31
|
146,250
|
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
|
Cancelled/Expired
|
(65,000
)
|
0.36
|
-
|
-
|
(40,000
)
|
|
Outstanding
as of September 30, 2017
|
40,587,097
|
$
0.38
|
$
0.48
|
3.38
|
$
15,251,085
|
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 9 – FINANCIAL INSTRUMENTS
The Company has financial instruments that are considered
derivatives or contain embedded features subject to derivative
accounting. Embedded derivatives are valued separately from the
host instrument and are recognized as derivative liabilities in the
Company’s balance sheet. The Company measures these
instruments at their estimated fair value and recognizes changes in
their estimated fair value in results of operations during the
period of change. The Company has estimated the fair value of these
embedded derivatives for convertible debentures and associated
warrants using a multinomial lattice model as of September 30, 2017
and June 30, 2017. The fair values of the derivative instruments
are measured each quarter, which resulted in a loss of $209,039 and
$111, and derivative expense of $133,652 and $0 during the three
months ended September 30, 2017 and 2016, respectively. As of
September 30, 2017, and June 30, 2017, the fair market value of the
derivatives aggregated $2,932,616 and $2,145,065, respectively,
using the following assumptions: estimated 5-0 year term, estimated
volatility of 174.38 -104.82%, and a discount rate of
1.77-0.96%.
NOTE 10 – FAIR VALUE MEASUREMENTS
For asset and liabilities measured at fair value, the Company uses
the following hierarchy of inputs:
|
●
|
Level
one — Quoted market prices in active markets for identical
assets or liabilities;
|
|
|
|
|
●
|
Level
two — Inputs other than level one inputs that are either
directly or indirectly observable; and
|
|
|
|
|
●
|
Level
three — Unobservable inputs developed using estimates and
assumptions, which are developed by the reporting entity and
reflect those assumptions that a market participant would
use.
|
Liabilities measured at fair value on a recurring basis at
September 30, 2017, are summarized as follows:
|
|
|
|
|
|
|
Fair
value of derivatives
|
$
-
|
$
-
|
$
2,932,616
|
$
2,932,616
|
|
Securities
available-for-sale
|
$
47,940
|
$
-
|
$
-
|
$
47,940
|
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company may become involved in certain legal proceedings and
claims which arise in the normal course of business. The Company is
not a party to any litigation. To the best of the knowledge of our
management, there are no material litigation matters pending or
threatened against us.
Lease Agreements
We lease offices in Hollywood, California (located at 6671 Sunset
Blvd., Suite 1520, 1518 and 1550, Hollywood, California, 90028) for
corporate, research, engineering and mastering services. The lease
expires on December 31, 2017. The total lease expense for the
facility is approximately $17,220 per month, and the total
remaining obligations under these leases at September 30, 2017,
were approximately $52,722.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 11 – COMMITMENTS AND CONTINGENCIES
-
continued
We lease a warehouse space located at 8260 E Gelding Drive, Suite
102, Scottsdale, Arizona, 85260. The lease expires on February 28,
2019. The total lease expense for the facility is approximately
$1,888 per month, and the total remaining obligations under this
leases at September 30, 2017, were approximately
$5,786.
We lease corporate offices located at 7825 E Gelding Drive, Suite
101, Scottsdale, Arizona, 85260. The lease expires on April 30,
2021. The total lease expense for the facility is approximately
$7,224 per month, and the total remaining obligations under this
leases at September 30, 2017, were approximately
$22,701.
We lease corporate offices located at 7825 E Gelding Drive, Suite
103, Scottsdale, Arizona, 85260. The lease expires on April 30,
2021. The total lease expense for the facility is approximately
$3,000 per month, and the total remaining obligations under this
leases at September 30, 2017, were approximately
$9,000.
Below is a table summarizing the annual operating lease obligations
over the next 5 years:
|
Year
|
|
|
2018
|
$
127,561
|
|
2019
|
141,464
|
|
2020
|
131,475
|
|
2021
|
87,287
|
|
2022
|
-
|
|
Total
|
$
487,786
|
Other
The Company has not declared dividends on Series A or B Convertible
Preferred Stock or its Series A-1 Convertible Preferred Stock. The
cumulative dividends in arrears through September 30, 2017 were
approximately $965,305.
As of the date of this filing, the Company has not filed its tax
return for the fiscal year ended 2015, 2016, and 2017.
NOTE 12 – INVENTORIES
Inventories
are stated at the first in first out and consisted of the
following:
|
|
|
|
|
|
|
|
|
Components
|
$
254,834
|
$
159,017
|
|
Finished
Goods
|
5,840
|
-
|
|
Allowance
/ Reserve
|
(54,126
)
|
(54,126
)
|
|
Totals
|
$
206,548
|
$
104,891
|
NOTE 13 - SUBSEQUENT EVENTS
In accordance with ASC 855, Company’s management reviewed all
material events through the date of this filing and determined that
there were the following material subsequent events to
report:
From October through November, the Company
issued
575,000 shares of
Common Stock for $57,500 in cash as part of a private
placement.
The Company also issued
75,000 warrants as part of a private placement valued at $6,019.
The warrants are considered derivative liabilities under ASC 815-40
under the Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
On October 16, 2017, the Company issued a convertible note to an
unrelated company for $110,000 that matures on July 16, 2018. The
note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at 57.5% of the lowest
closing bid 30 days prior to the conversion
date. Additionally, the note contains a percentage
discount (variable) exercise price which causes the number to be
converted into a number of common shares that “approach
infinity”, as the underlying stock price could approach
zero. The Company determined under ASC 815, the Company has
determined that this percentage discount (variable) exercise
price indicates that these shares, if issued, are not indexed
to the Company’s own stock and, therefore, is an embedded
derivative financial liability, which requires bifurcation and to
be separately accounted for. At each reporting period, the Company
will mark this derivative financial instrument to its estimated
fair value.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 13 - SUBSEQUENT EVENTS
-
continued
The Company extended the possibility to convert
date by issuing 60,000 warrants valued at $7,813 on September 8,
2017 to November 2, 2017.
The warrants are
considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company extended the possibility to
convert date by paying $164,469 in principal on October 23, 2017 to
February 21, 2018.
The warrants are
considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On February 23, 2017, the Company issued a
convertible note to an unrelated company for $224,000 that matures
on November 23, The Company extended the possibility to convert
date by issuing 90,000 warrants valued at $11,720 on September 8,
2017 to November 2, 2017. The Company extended the possibility
to convert date by paying $251,726 in principal on October 23, 2017
to February 21, 2018.
The warrants are
considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model
.
The Company evaluated amendment under ASC
470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
On October 29, 2017, the Company issued a convertible note to an
unrelated company for $100,000 that matures on October 29, 2018.
The note bears 10% interest per annum and is convertible into
shares of the Company’s common stock at $.10. The
Company determined under ASC 815, the Company has determined that
this percentage discount (variable) exercise
price indicates that these shares, if issued, are not indexed
to the Company’s own stock and, therefore, is an embedded
derivative financial liability, which requires bifurcation and to
be separately accounted for. At each reporting period, the Company
will mark this derivative financial instrument to its estimated
fair value.
On October 31, 2017, the Company issued a secured promissory note
to an unrelated party for $255,000, that matures on February 28,
2018. The note bears 2.5% interest per month. The note is to be
paid back the greater of $1,000 per day and $75 per unit sold
commencing 31 days after closing, the greater of $1,500 per day and
$75 per unit sold commencing 61 days after closing, the greater of
$2,000 per day and $75 per unit sold commencing 91 days after
closing.
The
note was amended on October 30, 2017, to extend the conversion
rights from 180 days to 225 days, in consideration of the extension
the Company paid $25,000 and issued 150,000 valued at $6,691. The
Company evaluated amendment under ASC 470-50,
“
Debt
- Modification and Extinguishment”
, and concluded that
the extension did result in significant and consequential changes
to the economic substance of the debt and thus resulted in an
extinguishment of the debt.
AFTERMASTER, INC.
Notes to Consolidated Financial Statements
September 30, 2017 and June 30, 2017
NOTE 13 - SUBSEQUENT EVENTS
-
continued
On November 1, 2017, the Company issued warrants to purchase a
total
of
150,000, with a three year life and a
conversion rate of $0.10,
in conjunction with
extension of three promissory notes valued at $6,691. The warrants
are considered derivative liabilities under ASC 815-40 under the
Company’s sequencing policy and were valued using
the
multinomial lattice
model.
The Company extended the maturity date for the seventh time by
increasing the principal balance by $30,000 on February 27, 2017 to
May 6, 2017. The Company evaluated amendment under ASC 470-50,
“
Debt
- Modification and Extinguishment”
, and concluded that the extension did not result
in significant and consequential changes to the economic substance
of the debt and thus resulted in a modification of the debt and not
extinguishment of the debt. The Company extended the maturity date
for the eighth time by increasing the principal balance by $30,000
on May 9, 2017 to June 20, 2017. The Company evaluated
amendment under ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt. The Company extended the maturity date for the ninth
time by increasing the principal balance by $30,000 on June 20,
2017 to August 4, 2017. The Company evaluated amendment under
ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt. The Company extended the maturity date for the tenth
time by paying additional consideration of $30,000 on August 3,
2017 to September 18, 2017. The Company evaluated amendment
under ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt. The Company extended the maturity date for the tenth
time by paying additional consideration of $30,000 on September 18,
2017 to November 2, 2017. The Company evaluated amendment
under ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt. The Company extended the maturity date for the tenth
time by paying additional consideration of $30,000 on November 2,
2017 to December 17, 2017. The Company evaluated amendment
under ASC 470-50, “
Debt - Modification and
Extinguishment”
, and
concluded that the extension did not result in significant and
consequential changes to the economic substance of the debt and
thus resulted in a modification of the debt and not extinguishment
of the debt.
NOTE 14 –RESTATEMENT OF INTERIM CONDENSED FINANCIAL
STATEMENTS
This Amendment No. 1 is to recognize cost of sales related to the
sale of 4,000 units for a total cost of $400,000 to its
manufacturer that was recorded in the three-months ended December
31, 2017. The sale of the 4,000 units took place during the quarter
ending September 30, 2017 therefore the cost of sales should have
been recorded in the same period. (ii) As part of the 4,000 units
transaction the manufacture agreed to extinguish $525,000 of
accounts payable, for the relief of the $400,000 in accounts
receivable, which resulted in a gain of
$125,000.
The
effects of these corrections on the interim consolidated financial
statements were:
|
|
Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
552,877
|
(400,000
)
|
152,877
|
|
Total Current
Assets
|
1,356,719
|
(400,000
)
|
956,719
|
|
Total
Assets
|
$
1,723,092
|
$
(400,000
)
|
$
1,323,092
|
|
Accounts payable
and other accrued expenses
|
$
518,642
|
$
(125,000
)
|
$
393,642
|
|
Total Current
Liabilities
|
11,341,552
|
(125,000
)
|
11,216,552
|
|
Total
Liabilities
|
11,341,552
|
(125,000
)
|
11,216,552
|
|
Accumulated
Deficit
|
(74,018,242
)
|
(275,000
)
|
(74,293,242
)
|
|
Total Stockholders'
Deficit
|
(9,618,460
)
|
(275,000
)
|
(9,893,460
)
|
|
Total Liabilities
and Stockholders' Deficit
|
$
1,723,092
|
$
(400,000
)
|
$
1,323,092
|
|
|
Consolidated
Statements of Operations and Comprehensive Loss
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
(Exclusive of Depreciation and Amortization)
|
156,328
|
400,000
|
556,328
|
|
Total Costs and
Expenses
|
1,077,125
|
400,000
|
1,477,125
|
|
Loss from
Operations
|
(461,729
)
|
(400,000
)
|
(861,729
)
|
|
Gain on
Extinguishment of Debt
|
(34,958
)
|
125,000
|
90,042
|
|
Total Other
Expense
|
(1,252,962
)
|
125,000
|
(1,127,962
)
|
|
Loss Before Income
Taxes
|
(1,714,691
)
|
(275,000
)
|
(1,989,691
)
|
|
NET
LOSS
|
$
(1,714,691
)
|
$
(275,000
)
|
$
(1,989,691
)
|
|
NET LOSS AVAILABLE
TO COMMON SHAREHOLDERS
|
$
(1,771,058
)
|
$
(275,000
)
|
$
(2,046,058
)
|
|
Basic and diluted
Loss Per Share of Common Stock
|
$
(0.01
)
|
$
(0.01
)
|
$
(0.02
)
|
|
NET LOSS AVAILABLE
TO COMMON SHAREHOLDERS
|
(1,771,058
)
|
(275,000
)
|
(2,046,058
)
|
|
COMPREHENSIVE
LOSS
|
$
(1,846,718
)
|
$
(275,000
)
|
$
(2,121,718
)
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
$
(1,714,691
)
|
$
(275,000
)
|
$
(1,989,691
)
|
|
(Gain)/Loss on
extinguishment of debt
|
34,958
|
(125,000
)
|
(90,042
)
|
|
Accounts
receivables
|
(455,774
)
|
400,000
|
(55,774
)
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report (the “Report”) includes
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, as amended, and as contemplated
under the Private Securities Litigation Reform Act of
1995. These forward-looking statements may relate to
such matters as the Company’s (and its
subsidiaries) business strategies, continued growth in the
Company’s markets, projections, and anticipated trends in the
Company’s business and the industry in which it operates
anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services,
anticipated market performance and similar matters. All
statements herein contained in this Report, other than statements
of historical fact, are forward-looking statements.
When used in this Report, the words “may,”
“will,” “expect,” “anticipate,”
“continue,” “estimate,”
“project,” “intend,” “budget,”
“budgeted,” “believe,” “will,”
“intends,” “seeks,” “goals,”
“forecast,” and similar words and expressions are
intended to identify forward-looking statements regarding events,
conditions, and financial trends that may affect our future plans
of operations, business strategy, operating results, and financial
position. These forward-looking statements are based largely on the
Company’s expectations and are subject to a number of risks
and uncertainties, certain of which are beyond the Company’s
control. We caution our readers that a variety of
factors could cause our actual results to differ materially from
the anticipated results or other matters expressed in the forward
looking statements, including those factors described under
“Risk Factors” and elsewhere herein. In
light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this Report will
in fact transpire or prove to be accurate. These risks
and uncertainties, many of which are beyond our control,
include:
|
|
●
|
the sufficiency of existing capital resources and our ability to
raise additional capital to fund cash requirements
for future
operations;
|
|
|
●
|
uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins, costs,
expenses and acceptance of
any products or services;
|
|
|
●
|
uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins, costs,
expenses and acceptance of
any products or services;
|
|
|
●
|
volatility of the stock market, particularly within the technology
sector;
|
|
|
●
|
our dilution related to all equity grants to employees and
non-employees;
|
|
|
●
|
that we will continue to make significant capital expenditure
investments;
|
|
|
●
|
that we will continue to make investments and
acquisitions;
|
|
|
●
|
the sufficiency of our existing cash and cash generated from
operations;
|
|
|
●
|
the increase of sales and marketing and general and administrative
expenses in the future;
|
|
|
●
|
the growth in advertising revenues from our websites and studios
will be achievable and sustainable;
|
|
|
●
|
that seasonal fluctuations in Internet usage and traditional
advertising seasonality are likely to affect our business;
and
|
|
|
●
|
general economic conditions.
|
Although we believe the expectations reflected in these
forward-looking statements are reasonable, such expectations cannot
guarantee future results, levels of activity, performance or
achievements. We urge you not to place undue reliance on
these forward-looking statements, which speak only as of the date
of this Annual Report.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
All references in this report to
“we,” “our,” “us,” the
“Company” or “AfterMaster” refer to
AfterMaster, Inc., and its
subsidiary and
predecessors.
Corporate Background
We are a Delaware corporation, incorporated on about May 12, 1988,
and traded on an over the counter market (ticker symbol
OTCQB:AFTM). As of September 30, 2017, there were
122,674,082
shares
of Common Stock issued and outstanding. The Company's office and
principal place of business, research, recording and mastering
studios are located at 6671 Sunset Blvd., Suite 1520, Hollywood, CA
90028 USA, and its telephone number is (310) 657-4886. The Company
also has an office at 7825 E. Gelding Drive, Suite 101, Scottsdale,
Arizona 85260 USA, and its telephone number is (480)
556-9303.
Aftermaster, Inc. (“the Company" or
“Aftermaster”) is an audio technology company located
in Hollywood, California and Scottsdale, Arizona. The Company's
wholly-owned subsidiaries include Aftermaster HD Audio Labs, Inc.
and MyStudio, Inc.
The Company and its subsidiaries are engaged in the development and
commercialization of proprietary (patents issued and pending),
leading-edge audio and video technologies and products for
professional and consumer use, including Aftermaster® Audio,
ProMaster™, Aftermaster Pro™ and MyStudio®. The
Company also operates recording and mastering studios at its
Hollywood facilities.
Aftermaster holds an unparalleled position in the audio technology
industry and it is operated by a world-class team of experts with
and extensive experience in music and audio technology. The
Aftermaster team has produced, engineered and mastered more hit
music than any other audio company in the world. We believe that
our expertise and technical skills have led us to develop audio
technologies unmatched in the audio industry. Aftermaster
technologies are both patented and patent pending, and these
technologies have won several awards.
www.aftermaster.com
Mission Statement
Aftermaster's goal is to become one of the most innovative and
important audio companies in the world through the development and
licensing of proprietary audio technologies, the development and
sales of leading-edge consumer and professional audio electronics
products and through its contributions in the production, mixing
and mastering of music, television and film audio.
Year End Summary
The Company is pleased to report that it is continuing its
“quarter over quarter” sales growth from its
Aftermaster products and services. For the quarter ending March 31,
2017, the Company recorded its then highest quarterly sales
revenues of $266,621, followed by revenues of $510,138 for the
quarter ending June 30, 2017 and further increased sales to
$615,396 for the quarter ending September 30, 2017. Losses from
operations also decreased dramatically during the quarter from
$1,839,781 to $446,622.
Based on current and forecasted sales, the Company believes that it
will continue to see increased growth from the sale of the
Aftermaster Pro, licensing, studio revenues and its partnership
with Tunecore. Increases from the sale of the Aftermaster Pro are
subject to having adequate inventory levels availiable to meet
demand.
On November 4, 2017 the Company entered into an agreement with
headphone manufacturer Muzik, Inc., to license its Aftermaster
technology (through both its Company’s proprietary DSP chip
and software application). Known as the “smartphone” of
headphones, award-winning Muzik has created the worlds most
advanced wireless headphone. Muzik's proprietary voice command and
multiple "hot keys" allow a user to access Spotify, Siri
and connect their headphones to over 300 apps from
fitness, news, and productivity to the connected home, commerce,
automotive, and social media. Muzik is considered the most
important new headphone designer and manufacturer.
The Company has also recently expanded its relationship with
Tunecore, Inc. TuneCore is considered to be one of the most
important artist portals where independent artists can
professionally master their music for an affordable fee. We
originally partnered with Tunecore in May 2016 to do the
professional music mastering for their independent artist services.
Our professional hands-on music mastering service is headed up by
Peter Doelle, one of the world’s most talented and respected
mastering engineers. Just recently, the Company entered into an
agreement to process all of the the instant music-mastering for
Tunecore that was previously done by Landr. Tunecore recognizes
that quality and value of the Company’s Promaster music
mastering for its artists. In September 2017, we displaced Landr
and became Tunecore’s exclusive mastering partner for instant
electronic music mastering. We continue to be Tunecore’s
choice for professional mastering services as well.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
During
the past year, the Company also designed and developed its first
professional hardware product dubbed the “Aftermaster Studio
Pro” which is the Company’s first product designed for
use in commercial audio applications. Due to the anticipated strong
demand from potential customers, the Company’s new product is
a “1 U, 19” rack-mount Aftermaster audio processor that
allows a user to enhance any audio playback with Aftermaster to
make their sound fuller, clearer, louder and deeper. It will retail
for $3,995 and can be seen at
www.aftermastermaster.com/products
.
The Company believes that the worldwide market for its new product
is significant, as it can be used in potentially hundreds of
thousands of applications worldwide: radio stations, private and
public recording studios, churchs, restaurants and bars, sports
facilities, high-end residential, live concerts and concert
facilities, hospitals – virtually anyplace where a business
wants the audio to sound significantly better than anything they
can do in house. The product is expected to be available for
pre-sale in the fourth quarter of 2017.
Despite our recent record growth and proof of product interest by
consumers, the Company’s sales performance continues to be
impacted due to manufacturing and financing challenges, both of
which have limited the timing of the rollout of some of our
products. The Company is currently negotiating with several
companies to provide the capital required and with a third-party
manufacturer with the expertise needed to streamline and provide a
stable environment in which to exponentially increase the
manufacturing rate and sales of our products. The Company has
issued an initial purchase order and paid a substantial deposit for
the electronic components and manufacturing of the first 100,000
circuit boards, which will allow an assembly manufacturer a
significant head start for larger scale unit
deliveries.
The
Company also recently completed an extensive renovation and
subsequently opened a world-class music recording studio originally
built by music legend Graham Nash and made famous by Crosby, Stills
and Nash in 1977, which is located adjacent to its existing studios
in Hollywood at Crossroads of the World. The studio is equipped
with state-of-the-art recording and mixing equipment, and it is
used for both audio research and development as well as to generate
revenue from rental to musicians. The Company considers it to be
one of the finest recording studios in the US, and it began
generating revenue in the first quarter of calendar 2017. It is the
largest of the six recording studios that Aftermaster now operates
at its studio facilities in Hollywood.
www.aftermaster.com/studios
Investment Bankers
The recent successful introduction of our Aftermaster Pro has led
the Company to engage a respected investment banking firm that
specializes in small cap stocks, Maxim Group of New York, to assist
the Company in concurrently raising the capital to both extinguish
its current debt and to provide the additional growth capital
required for the Company to complete an uplisting of its shares to
a larger trading platform. Such financing is contingent on market
conditions, share price and the performance of the company over the
next two fiscal quarters, and there is no guarantee that we will
raise such capital or complete such an uplisting.
TuneCore Agreement
Aftermaster offers both world-class, professional hands-on
mastering services and instant online mastering through its
Promaster brand for music, TV and film customers in its facilities
in Hollywood, California. The Professional Mastering division is
headed up by Peter Doell, one of the world’s foremost
mastering engineers. In May 2016, the Company entered into a
partnership with TuneCore Digital Music Services to provide
professional hands-on mastering services to TuneCore’s
customers. In September 2017, the Company expanded its relationship
with TuneCore and entered into a multi-year agreement to also
provide TuneCore with the Company’s award-winning Promaster
instant online mastering service to TuneCore’s artists. The
agreement displaced TuneCore’s previous relationship with
online mastering service, Landr. TuneCore was impressed by the
music quality and technologies developed by
Aftermaster.
Currently, TuneCore is one of the world's largest independent
digital music distribution and publishing administration service.
Under our agreement, Aftermaster has become the platform for both
hands-on professional and online instant mastering services for
TuneCore’s artists on an exclusive basis. TuneCore has one of
the highest artist revenue-generating music catalogs in the world,
earning TuneCore Artists approximately $987 million from billions
of downloads and streams. TuneCore’s music distribution
services help artists, labels and managers sell their music through
iTunes, Amazon Music, Spotify and other major download and
streaming sites while retaining 100% of their sales revenue and
rights for a low annual flat fee. TuneCore’s artists have
direct access to Aftermaster's world-class senior mastering
engineers and unmatched technologies and can get their tracks hand
mastered for a premium price or instantly electronically mastered
through Aftermaster's Promaster, returned and ready for
distribution. The partnership builds upon TuneCore's mission to
provide independent artists with key tools to build their careers
and gain broad fan expsoure, by granting access to unparalleled
mastering that meets the industry's highest standards.
Home Shopping Network
On April 15, 2017, the Company introduced its Aftermaster Pro
personal re-mastering device on national television on the Home
Shopping Network (HSN) during two 15-minute infomercials. Home
Shopping Network is one of the world’s largest television
retailers. HSN initially purchased 1,000 Aftermaster Pros, and its
management team has expessed to the Company that it considered the
launch to be a big success. HSN has subsequently issued the Company
purchase orders for several thousand more units and began new
airing dates on June 9, 2017 followed on September 2, 2017.
Additional dates are expected to be announced for the quarter ended
December 31, 2017. HSN provides a unique format which provides the
Company with the opportunity to showcase the quality of the
product, while explaining the differentiating features and
operation of its Aftermaster Pro on national television. The
Company expects that Aftermaster Pro will continue to be featured
on HSN and by other television, online and store based
retailers.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
–
continued
Icon Health and Fitness Products
During the year, the Company entered into a consulting and license
agreement with ICON Health & Fitness, Inc.
(“ICON”), pursuant to which the Company will act as an
audio technology development consultant to develop an
AfterMaster-based sound module for integration with ICON’s
exercise equipment. ICON will pay the Company a per module fee and
receive a license from the Company to use or sell the modules and
use the software relating to each module in its products. The
Company will also provide audio tuning services to further enhance
the sound quality for ICON’s other audio-enabled equipment.
The Company has agreed with ICON on a product development schedule,
and the companies currently expect to unveil an
Aftermaster-equipped premium fitness product at the upcoming
Consumer Electronics show (“CES”) in Las Vegas in
January 2018.
ICON
Health and Fitness, Inc. is the world’s largest manufacturer
and marketer of home fitness equipment, selling over 10 million
audio-enable fitness-related devices annually. ICON manufactures
treadmills, elliptical trainers, stationary bicycles, weight
machines and benches, and yoga and Pilates equipment. ICON has a
wide range of well-known and respected brands, products and
technologies, and sells home fitness and health club equipment
under the following brands: NordicTrack®, ProForm®,
Weider®, Gold's Gym® Home Fitness and FreeMotion®.
Its fitness technology brand, including Wi-Fi-enabled fitness
equipment and fitness wearables, is iFit
®.
CB2 Marketing Agreement
CB2 (a division of Crate and Barrel), an industry leading lifestyle
furniture retailer, and the Company have entered into a multi-year
partnership to
bring music and lifestyle spaces together like
never before. CB2 has unique positioning in the furnishings
industry as a modern, affordable and socially responsible brand who
regularly offers its sophisticated clientele new and exciting
opportunities to better their lifestyle and living
environments.
Under the partnership, CB2’s customers will receive the
chance to purchase the unprecedented leading-edge audio through
Aftermaster’s revolutionary technology to be showcased with
the CB2 platforms in a myriad of ways. As part of its collaborative
strategic venture, CB2 began offering the Company's
Aftermaster
Pro
personal audio remastering devices at key store
locations across the United States including West Hollywood, New
York: Soho, South Beach, Chicago, and Austin. The units retail at
$189.99 in stores and online at CB2
's website
.
In addition, Aftermaster will now be a part of powering
CB2’s
“After Hours” concert series. The
“After Hours”
events transform CB2 locales into intimate
nocturnal music experiences. Just after closing time, the stores
play host to a bevy of notable artists as they perform a
one-of-a-kind show to an exclusive audience sipping on cocktails in
a chic and sophisticated atmosphere. Aftermaster provides enhanced
audio capability for these shows with its proprietary technology
and offers unrivaled sound in real-time. Attendees may also try the
Aftermaster Pro at demo stations throughout the stores during these
events. We believe this is another important brand awareness and
revenue avenue for the Pro.
Extending this partnership, CB2 also outfitted Aftermaster's famous
music recording studios at Crossroads of the World in Hollywood,
with a complete makeover of new furniture including
"first-to-be-seen" pieces from their latest
collection.
Aftermaster Consumer and Professional Electronics
Products
The Company has assembled a world-class branding, technical and
design team who have designed the the Companies first consumer and
professional electronics products. The first consumer electronics
product is the Aftermaster Pro, designed to dramatically improve
the quality of TV audio. Aftermaster Pro is the world’s first
personal audio re-mastering device and defines a new category in
consumer electronics products by offering a product never before
offered. Aftermaster Pro is a proprietary, first-to-market product
which has no direct competition.
The number of existing televisions worldwide is substantial, and a
majority of TV owners complain about their TV audio quality,
especially about having to continually adjust the volume because of
difficulty hearing dialogue in certain programming. Feedback from
thousands of TV owners have provided the Company with valuable data
that confirms that no manufacturer is delivering an audio solution
with the same sound quality of Aftermaster Pro.
Smaller than an iPhone, Aftermaster Pro transforms the audio of
your TV, smartphone, headphones, laptop, tablet, gaming unit, or
virtually any audio-enabled device to sound clearer, fuller,
deeper, and more exciting. Aftermaster Pro connects easily via HDMI
or 3.5mm audio cables with virtually any media source (i.e., cable,
satellite box, cell phone, computer, tablet, etc.). When used with
a television, Aftermaster Pro raises and clarifies dialogue in
programming while significantly enhancing the quality of the
overall audio content. This solves the longstanding issue with TV
audio of having to continually adjust volume during a TV show to
hear dialogue. When used portably with its built-in battery,
Aftermaster transforms music and video to standards that we believe
are superior to any portable audio enhancement device.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
The Company has an aggressive marketing and sales plan for the
Aftermaster Pro, which is the Company's first consumer electronics
product completely developed in-house. The Aftermaster Pro debuted
to consumers on national television on the Home Shopping Network
(“HSN”) show on April 15, 2017. The Aftermaster Pro
sales were deemed to be very successful, and the product has since
been featured on 5 additional HSN programs in June and September;
additional programming with HSN has been scheduled for the fourth
calendar quarter of 2017. In June 2017, the Aftermaster Pro also
went on sale at Crate and Barrel's "CB2" stores (see below) and is
also now available at several other prominent online retail outlets
including Amazon.com, Walmart.com, as well as the Company’s
own website, Aftermasterpro.com. The Company has engaged a well
regarded marketing firm and will begin an online advertising
campaign in November 2017 designed to drive buyers to our various
online retailers using the same ad process that produced highly
successful sales metrics during our crowdfunding
campaigns.
The
Company has sold thousands of Aftermaster Pros to buyers in 65
countries and has generated revenues over $1,000,000. A majority of
the sales were at $150 per unit. www.aftermasterpro.com
.
Additional Aftermaster branded consumer electronics products
products are under development, which we expect to introduce in the
coming year.
The
“Aftermaster Studio Pro” is the Company’s first
product designed for use in commercial audio environments. Due to
the strong demand from potential customers, the Company’s new
product is a 1 U, 19” rack mount Aftermaster audio processor
that allows a user to enhance any audio playback with Aftermaster
to make their sound fuller, clearer, louder and deeper. The
worldwide market is significant as it can be used in radio
stations, private and public recording studios, church’s,
restaurants and bars, sports facilities, high-end residential,
concerts and concert facilities.
ON Semiconductor/Aftermaster Audio Chip and Software
The Company is party to a multi-year joint development and
marketing agreement with ON Semiconductor ("ON") of Phoenix,
Arizona, to commercialize its technology through audio
semiconductor chips. ON is a multi-billion dollar, multi-national
semiconductor designer and manufacturer.
The agreement calls for ON to implement and support our Aftermaster
technology in a Digital Signal Processor (DSP) semiconductor chip
that is being marketed to their current OEM customers, distributors
and others. We selected ON for its technical capabilities, sales
support and deep customer pool.
In conjunction with ON, we have completed the development of an
Aftermaster software algorithm that is designed to be used in
semiconductor chips or as a standalone software product. We believe
the sound quality from our algorithm provides a superior audio
experience relative to other products on the market.
Now
branded the BelaSigna 300 AM chip, it is one of the smallest, high
power/low voltage DSP chips available. It is small enough to fit
into a hearing aid but equally effective in any size device with
audio capability.
Since entering into the agreement, both the Company and ON have
identified a large number of prospective customers that will be key
targets for this new and unprecedented technology. The algorithm
and chips allow consumer product manufacturers an opportunity to
offer a significantly improved and differential audio experience in
their products without having to significantly change hardware and
form factor designs. Through the combined relationships of the
Company and ON, we hope to generate significant revenues for both
parties through the sale of the ON/AfterMaster chips and software
licensing.
The sales efforts of our semiconductor chips and Aftermaster
software have been substantially delayed, as the sales plans and
efforts relied on the completion of the Aftermaster Pro, which was
just recently completed. Despite the delay, the Company currently
has several sales and licensing agreements pending which it expects
to finalize during the year.
Promaster
Promaster is an online music mastering, streaming, and storage
service designed for independent artists which utilizes proprietary
audio technologies developed by Aftermaster.
Tens of millions of songs are produced, distributed and played on
the Internet each month around the world by independent artists.
However, many of these artists lack the financial and technical
means to master, or “finish” their composition, as a
professional mastering session can cost up to $500 per song. Now,
with the Promaster online platform, musicians can transmit their
music directly to the Promaster HD website, where it can be
mastered with Aftermaster technology for $9.99 per song. Each user
receives four different mastered versions of their song done in
different styles, and they can preview 90 seconds of each version
to make a decision about whether or not they want to buy
it.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
Promaster creates a compelling offering for those seeking to
significantly enhance the quality of their music for personal use,
or with intent to showcase their music in hopes of advancing their
career aspirations. Based on the enormous addressable market for
this product, we believe that Promaster has the potential to
generate significant revenues for the Company.
Our
Promaster on-line music mastering product is in the final stages of
a complete redesign including the addition of new features. The
current website will remain active until the new website is
launched in the coming months.
www.promasterhd.com
Recording and Mastering Studios
Aftermaster operates six (6) recording and mastering studios at its
Hollywood California facility. The Company’s engineers mix
and master music for both independent and high profile artists, and
they are currently mastering the music for the hit TV show
"Empire".
The
Company recently took over the former recording studio built by
music legends Crosby, Stills and Nash in 1977, which is located
next to its existing studios. The Company recently completely
renovated the studio and installed state-of-the-art equipment. The
Company considers the new studio to be one of the finest recording
studios in the US and expects it to begin generating revenues in
the first quarter of 2018
www.aftermaster.com/studios
Adobe Audition
Aftermaster's Promaster on-line audio mastering service has been
chosen to be included with Adobe® Audition® CC, a
professional audio workstation for mixing, finishing and editing
audio/video. The integration of Promaster will allow Adobe Audition
CC users to instantly master their original work directly within
Adobe Creative Cloud®. Promaster infuses the clearest, deepest
sound quality into any recording, which elevates that audio to a
studio remastered sound experience. Adobe's Audition CC with
Promaster HD will enable its users to substantially cut editing
time and enhance original audio work into fuller, deeper, louder
and clearer tracks. When ready, users will install the Promaster
extension from the Adobe Add-ons marketplace.
The integration of Promaster into Adobe Audition has been delayed
due the Company undertaking a complete redesign of its ProMaster
website including adding many new features to the platform. The
Company expects to complete the integration in the coming
months.
Aftermaster Audio
Technology
Aftermaster audio technology was created and developed pursuant to
a multi-year, multi-million dollar development effort to make
digital audio sound substantially better by developing proprietary
software, digital signal processing technology and consumer
products. The Aftermaster Audio Labs team is comprised of a unique
group of award-winning industry leaders in music, technology and
audio engineering which includes Ari Blitz, Peter Doell, Rodney
Jerkins, Larry Ryckman, Justin Timberlake, Paul Wolff, Andrew
Wuepper and Shelly Yakus. See
www.Aftermaster.com
.
The Aftermaster audio technology is an internally-developed,
proprietary (patented and patents pending) mastering, remastering
and audio processing technology which makes virtually any audio
source sound significantly louder, fuller, deeper and clearer.
Aftermaster is a groundbreaking technology which eliminates the
weaknesses found in other audio enhancement and processing
technologies while offering a much superior audio experience for
consumer and industrial applications. We believe that our
Aftermaster audio technology is one of the most significant
breakthroughs in digital audio processing technology and has the
potential to create significant revenues for the Company. The broad
commercialization of this technology is a top priority for the
Company.
As the convergence of features on consumer electronics continues,
it is becoming more difficult for leading consumer electronics
companies to differentiate their products. We believe that
Aftermaster provides a unique and significant competitive advantage
for consumer electronics manufacturers by offering their customers
a superior audio experience. Aftermaster technology can be
incorporated into most audio capable devices through the addition
of an Aftermaster DSP chip or Aftermaster software. Such uses are
intended to include phones (i.e., mobile, home, business and VoIP);
headphones; televisions; stereo speakers; stereos (i.e., home,
portable, commercial and automobile); and computers (i.e., desktop,
laptop and tablets).
Aftermaster
audio is also the only commercial audio enhancement technology
available that is used for professional music mastering because it
enhances the entire frequency range without distortion or changing
the underlying intent of the music. The technology has been used to
master music created by some of the worlds most populat artists.
Further information on Aftermaster and Aftermaster products can be
found at www.Aftermaster.com
.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
Intellectual Property and Licensing
The Company has been awarded six patents and six trademarks with
numerous others pending. The Company has an aggressive intellectual
property strategy to protect the Aftermaster and the related
technologies it has developed. We also enter into confidentiality
and invention assignment agreements with our employees and
consultants and confidentiality agreements with third parties. We
rigorously control access to our proprietary technologies. During
the year, the Company engaged Morgan Chu of Irell and Manella, to
represent its intellectual property interests along with its
existing IP attorneys Farjami & Farjami LLP and Arnold
Weintraub of the Weintraub Group. Mr. Weintraub serves on the Board
of the Company.
Employees
As of June 30, 2017, we employed thirteen full-time and one
part-time employees. We expect to add additional employees in the
next year to handle anticipated potential growth.
We believe that our relationship with our employees is good. None
of our employees are members of any union nor have they entered
into any collective bargaining agreements.
Facilities
We lease offices in Hollywood, California (located at 6671 Sunset
Blvd., Suite 1520, 1518 and 1550, Hollywood, California, 90028) for
corporate, research, engineering and mastering services. The lease
expires on December 31, 2017. The total lease expense for the
facility is approximately $17,220 per month, and the total
remaining obligations under these leases at September 30, 2017,
were approximately $52,722.
We lease a warehouse space located at 8260 E Gelding Drive, Suite
102, Scottsdale, Arizona, 85260. The lease expires on February 28,
2019. The total lease expense for the facility is approximately
$1,888 per month, and the total remaining obligations under this
leases at September 30, 2017, were approximately
$5,786.
We lease corporate offices located at 7825 E Gelding Drive, Suite
101, Scottsdale, Arizona, 85260. The lease expires on April 30,
2021. The total lease expense for the facility is approximately
$7,224 per month, and the total remaining obligations under this
leases at September 30, 2017, were approximately
$22,701.
We lease corporate offices located at 7825 E Gelding Drive, Suite
103, Scottsdale, Arizona, 85260. The lease expires on April 30,
2021. The total lease expense for the facility is approximately
$3,000 per month, and the total remaining obligations under this
leases at September 30, 2017, were approximately
$9,000.
|
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
AfterMaster
Revenues
|
$
120,715
|
$
54,486
|
|
AfterMaster
Product Revenues
|
494,681
|
-
|
|
Total
Revenues
|
$
615,396
|
$
54,486
|
We currently generate revenue from our operations through three
activities: AfterMaster revenues and AfterMaster product
revenues.
AfterMaster revenues are generated primarily from AfterMaster audio
services provided to producers and artists on a contract basis. We
hope this source of revenue grows in coming years, and the Company
is expecting to generate additional revenues in this category from
on-line mastering downloads and the development of the AfterMaster
software algorithm and chip, although such growth and additional
revenues are not assured and may not occur. AfterMaster revenues
for the three months ended September 30, 2017, increased to
$120,715, as compared to $54,486 for the comparable three months
ended September 30, 2016, the increases were due primarily to an
increase in the mastering and remastering of music and licensing by
our customers and recognition of deferred revenues from
sales.
Product revenues are generated through the sale of the AfterMaster
TV Pro. Our product revenues were $494,681 and $0 during
the three months ended September 30, 2017 and 2016. The increase
was due to the company introducing the produce for sale in the
fourth quarter of the prior fiscal year.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-
continued
In the aggregate, total Company revenues increased to $615,396 for
the three months ended September 30, 2017, as compared to total
revenues of $54,486 for the three months ended September 30, 2016,
due to the company launching the AfterMaster TV Pro after the prior
quarter.
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Cost
of Revenues (excluding depreciation and amortization)
|
$
556,328
|
$
162,095
|
Cost of sales consists primarily of manufacturing cost of the
AfterMaster Pro TV consumer electronic product, AfterMaster Studio
Rent, Consultants, senior engineers, and Internet connectivity and
excludes depreciation and amortization on the studios. The
increase in cost of sales for the three months ended
September 30, 2017, over the comparable three-month period, is
attributable, primarily, due to an increase in manufacturing
cost of $400,000 for a large sale to the Company’s
manufacturer for 4,000 units in the current quarters. offset
by a decrease in utilities, salaries, and overhead costs
offset by increases in cost directly related to AfterMaster Pro TV
and rent expense. The company had manufacturing cost in the amount
of $91,398 for the AfterMaster Pro TV for the three months ending
September 30, 2017.
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization Expense
|
$
38,969
|
$
40,539
|
|
Research
and Development
|
2,194
|
66,995
|
|
Advertising
and Promotion Expense
|
2,016
|
15,079
|
|
Legal
and Professional Expense
|
14,190
|
24,266
|
|
Non-Cash
Consulting Expense
|
76,438
|
871,971
|
|
General
and Administrative Expenses
|
786,990
|
712,836
|
|
Total
|
$
920,797
|
$
1,731,686
|
Operating expenses consist primarily of compensation and related
costs for our finance, legal, human resources, investor
relation, Public relations and information technology
personnel; advertising and promotion expenses; rent and facilities;
and expenses related to the issuance of stock compensation.
During
the three months ended
September 30, 2017
, General and
administrative expenses increased by $74,154 as compared to the
three months ending September 30, 2016. The increases in General
and administrative expenses is due to increases in consulting
services, insurance expense, and wages expense partially set of by
increases in tradeshows and investor relations.
During
the three months ended
September 30, 2017
, Research
and Development costs decreased by $64,801, Advertising and
Promotion decreased by $13,063, Legal and Professional fees
decreased by $10,076 and consulting services decreased by $795,533,
as compared
to the three ending
September 30, 2016
. The
decreases in Research and Development, decreases in Advertising and
Promotion, and consulting services are primarily due to the design,
development and marketing of its Aftermaster Pro consumer hardware
product. Legal and Professional fees decrease are primarily to the
company only using one attorney on a monthly retainer to handle all
the company’s legal needs.
|
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
$
(875,313
)
|
(369,073
)
|
|
Derivative
Expense
|
(133,652
)
|
-
|
|
Change in Fair
Value of Derivative
|
(209,039
)
|
(111
)
|
|
Gain on Extinguishment of Debt
|
(90,042
)
|
-
|
|
Total
|
$
(1,127,962
)
|
$
(369,184
)
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
The other expenses during the quarter ended September 30, 2017,
totaling $1,127,962 of expenses, which consists of
interest expense, derivative expense, change in fair value of
derivative, and gain on extinguishment of debt. During
the comparable period in 2016, other expenses totaled $369,184.
Interest expense has increased primarily due to an increase in
non-cash interest expense relating to warrants attached to recent
debt discount. These additional borrowings have been
used in the development of the AfterMaster HD. Derivative expense
and change in fair value of derivatives has increased due to the
issuance of derivative instruments in the current period and the
company revaluing the instruments at the end of the current period.
Loss on extinguishment of debt increased in the current period due
to notes extinguished in the current period.
|
Net Loss
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Net
Loss
|
$
(1,989,691
)
|
$
(2,208,479
)
|
Due to the Company’s cash
position, we use our Common Stock as currency to pay many
employees, vendors and consultants. Once we have raised
additional capital from outside sources, as well as generated cash
flows from operations, we expect to reduce the use of Common Stock
as a significant means of compensation. Under FASB ASC 718,
“
Accounting for Stock-Based
Compensation”and ASC 505,
Equity
Based Payments to Non-Employees”
,
these non-cash issuances are expensed at the
equity instruments fair market
value.
Absent
these large stock-based compensations of $76,438 and $871,971,
derivative expense of $133,652 and $0, loss on the change in the
derivative liability of $209,039 and $111 for the three months
ended September 30, 2017 and 2016, our net loss would have been
$1,570,562 and $1,336,397 for three months ended
September 30, 2017 and 2016,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company had revenues of $
615,396
during
the three months ended September 30, 2017 as compared to
$
54,486
in
the comparable quarter of 2016. The Company has incurred losses
since inception of $74,293,242. At September 30, 2017,
the Company has negative working capital of
$10,259,833, which was a decrease in working capital
of $1,388,721 from June 30, 2017.
The Company had cash of $86,634 as of
September 30, 2017, as compared to $
250,728
as
of June 30, 2017. The decrease is a result of the company entering
into ten (10) Share Purchase Agreements with individual accredited
investors resulting in net proceeds of $168,500, three (3) notes
payable resulting in net proceeds of $175,000, one (1) related
notes payable resulting in net proceeds of $18,000, and ten (10)
convertible notes payable resulting in net proceeds of $438,500
compared to thirty-five (35) Share Purchase Agreements with
individual accredited investors resulting in net proceeds of
$1,344,648 to the Company in the prior year. This amount was also
decreased by operational costs, purchases of assets, and payments
of obligations from convertible notes, notes, and lease
payables.
The company had more expenses during the quarter then the funding
which resulted in a decrease in cash. The decrease is related to
the company having less funding during the quarter ending September
30, 2017 as compared to June 30, 2017.
The Company had prepaid expense of $462,720 as of September 30,
2017, as compared to $507,254 as of June 30, 2017. The
decrease is due to the Company amortizing the prepaid expenses
totaling $76,438 over the three months ended September 30, 2017,
partially offset by the issuance of two consulting agreements
entered into in the current period.
The future of the Company as an operating business will depend on
its ability to obtain sufficient capital contributions and/or
financing as may be required to sustain its
operations. Management’s plan to address these
issues includes a continued exercise of tight cost controls to
conserve cash and obtaining additional debt and/or equity
financing.
As we continue our activities, we will continue to experience net
negative cash flows from operations, pending receipt of significant
revenues that generate a positive sales
margin.
The Company expects that additional operating losses will occur
until net margins gained from sales revenue is sufficient to offset
the costs incurred for marketing, sales and product development.
Until the Company has achieved a sales level sufficient to break
even, it will not be self-sustaining or be competitive in the areas
in which it intends to operate.
In addition, the Company will require substantial additional funds
to continue production and installation of the additional studios
and to fully implement its marketing
plans.
As of September 30, 2017, the existing capital and anticipated
funds from operations were not sufficient to sustain Company
operations or the business plan over the next twelve
months. We anticipate substantial increases in our cash
requirements which will require additional capital to be generated
from the sale of Common Stock, the sale of Preferred Stock,
equipment financing, debt financing and bank borrowings, to the
extent available, or other forms of financing to the extent
necessary to augment our working capital. In the event
we cannot obtain the necessary capital to pursue our strategic
business plan, we may have to significantly curtail our
operations. This would materially impact our ability to
continue operations. There is no assurance that the Company will be
able to obtain additional funding when needed, or that such
funding, if available, can be obtained on terms acceptable to the
Company.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-
continued
Recent global events, as well as domestic economic factors, have
recently limited the access of many companies to both debt and
equity financings. As such, no assurance can be made that financing
will be available or available on terms acceptable to the Company,
and, if available, it may take either the form of debt or equity.
In either case, any financing will have a negative impact on our
financial condition and will likely result in an immediate and
substantial dilution to our existing
stockholders.
Although the Company intends to engage in a subsequent equity
offering of its securities to raise additional working capital for
operations, the Company has no firm commitments for any additional
funding, either debt or equity, at the present time.
Insufficient financial resources may require the Company to delay
or eliminate all or some of its development, marketing and sales
plans, which could have a material adverse effect on the
Company’s business, financial condition and results of
operations. There is no certainty that the expenditures to be
made by the Company will result in a profitable business proposed
by the Company.